International Construction Arbitration John Savage Partner and Head

International Construction Arbitration John Savage Partner and Head of International Arbitration, Asia December 13, 2007 1

Outline of the Presentation I. Introduction to International Construction Arbitration II. Issues that Cause International Construction Disputes III. Typical International Construction Claims IV. Common Mechanisms for Resolving International Construction Disputes V. Introduction to FIDIC and its Dispute Resolution Provisions VI. Conduct of a Typical International Arbitration VII. Investment Treaty Arbitration and Construction Disputes VIII. Advice on Drafting International Construction Dispute Resolution Provisions IX. Advice on Preparing for and Conducting International Construction Disputes 2

I. Introduction to International Construction Arbitration (1) Typical Features of International Construction Disputes (1) • Technically complex, fact intensive: require technical experts as well as lawyers • Often more than two parties, even in turnkey projects (involvement of subcontractors, suppliers, lenders, consultants, other contractors etc) • Often more than one relevant contract (subcontracts, supply contracts, construction of other facilities on same project, offtake contracts, operation and maintenance etc) • Parties of (sometimes many) different nationalities on the same job • Site may be in another country altogether 3

I. Introduction to International Construction Arbitration (2) Typical Features of International Construction Disputes (2) • Large sums in dispute, at least in absolute terms • Project usually of long duration, with disputes emerging throughout • English law often applies, or at least contracts often inspired by English law • Use of standard form contracts (e. g. FIDIC contracts) • Not a separate area of law, in English law at least (general contract and tort law apply in most cases), but specialised lawyers, judges and arbitrators in practice 4

II. Issues that Cause International Construction Disputes (1) • Alleged interference by or deficiencies of Owner, such as: − − Late approvals or instructions − Changes in design/materials/specification − • Lack of site possession Non payment Alleged deficiencies of Contractor, such as: − Contractor design omissions and deficiencies − Defective manufacture and construction − Delayed performance (various causes attributable to contractor) − Excessive cost, when contract price not fixed 5

II. Issues that Cause International Construction Disputes (2) • Third party events, such as: − Adverse site conditions − Adverse weather − Material escalation − Hostilities/strikes − Changes in law 6

III. Typical International Construction Claims (1) • Contractor usually claims one or more of the following: − Compensation for extra work performed − Compensation and/or schedule relief for acceleration, delay and/or disruption − Payment and interest − Blocking draw of performance bond 7

III. Typical International Construction Claims (2) • Owner usually claims one or more of the following: − Damages (usually liquidated) for delay, or for poor performance (plant not at specification) − Correction or compensation for defective work (under warranties) − Draw on performance bond 8

IV. Common Mechanisms for Resolving International Construction Disputes (1) Non Binding Dispute Resolution Mechanisms • Mediation • Early Neutral Evaluation Temporarily Binding Dispute Resolution Mechanisms • Statutory Adjudication • Dispute Boards • Expert Determination (but can be final…? ) Binding Dispute Resolution Forms • Arbitration • Court Litigation 9

IV. Common Mechanisms for Resolving International Construction Disputes (2) Mediation (not binding) − Process conducted by third party mediator − Confidential − Without prejudice − Objective is to facilitate settlement of dispute by parties, not an evaluation − Can be effective if parties committed to process, attendees have power to settle, and if mediator competent 10

IV. Common Mechanisms for Resolving International Construction Disputes (3) • Early Neutral Evaluation (not binding) − An independent third party will give an evaluation of the dispute, like a one person Dispute Review Board − Parties will then have a predetermined period of time for follow-up direct negotiation with the goal of reaching settlement 11

IV. Common Mechanisms for Resolving International Construction Disputes (4) • Statutory Adjudication (temporarily binding) − Most important dispute resolution process in UK construction industry due to 1996 Construction Act − The Act makes adjudication mandatory for an agreement which involves “construction operations” in England, Wales or Scotland − Party can apply for adjudication “at any time”. Rapid procedure before an individual or a board, but must meet statutory conditions. Temporarily binding decision − Speedy but needs a court system to enforce adjudication decisions − Legislation has been adopted elsewhere, mainly in 12 Commonwealth jurisdictions such as Australia, New

IV. Common Mechanisms for Resolving International Construction Disputes (5) • Dispute Boards (temporarily binding) − Procedure where a standing panel of 1 or 3 engineers/lawyers appointed at the outset of project, and visit the site 3 or 4 times a year to monitor progress and deal with potential problems − When requested by the parties the Dispute Board conducts an informal hearing of the dispute and issues a recommendation or decision (depending on the contract). Decision temporarily binding, but can be challenged through arbitration or litigation − FIDIC and ICC have their own Dispute Board procedures 13

IV. Common Mechanisms for Resolving International Construction Disputes (6) • Expert Determination (1) (temporarily binding? ) A third party with expertise in a particular field is asked to give a determination on a disputed issue in that field − Generally used for a single issue or a handful of related issues, not a whole dispute − Either technical, financial or contractual issues − Flexible procedures, query if due process required − Parties can choose to use ICC Rules for Expertise in their contract − ICC International Centre for Expertise can administer the expert determination or act as appointing authority for the expert 14

IV. Common Mechanisms for Resolving International Construction Disputes (7) • Expert Determination (2) (temporarily binding? ) Difficulties with expert determination: − Finality/recourse (is it an arbitral award capable of challenge? ) − Which dispute resolved by expert, which by arbitrators − What to do with legal questions brought before expert − Flexibility/vagueness of procedures − Enforcement 15

IV. Common Mechanisms for Resolving International Construction Disputes (8) • Arbitration (1) (binding) − Most international construction contracts specify arbitration as final resort if interim dispute resolution measures fail − Arbitration generally preferred over court litigation (see later slides) − Larger disputes usually involve 3 member tribunal − Common to have use of tiered dispute resolution clauses, e. g. negotiation then arbitration, dispute board then arbitration etc. 16

IV. Common Mechanisms for Resolving International Construction Disputes (9) • Arbitration (2) (binding) No institutions specialised in construction cases. Instead, we recommend usual top international arbitration institutions, such as: − International Chamber of Commerce (ICC) − London Court of International Arbitration (LCIA) − Singapore International Arbitration Centre (SIAC) − Hong Kong International Arbitration Centre (HKIAC) − Beijing Arbitration Commission (BAC) or CIETAC for arbitration in China (Note: leading institutions’ arbitration rules are largely similar) 17

IV. Common Mechanisms for Resolving International Construction Disputes (10) • Court litigation (binding) − usually in the country of one or other party (not neutral) − usually subject to one or more levels of appeal − cost and duration can vary enormously from country to country 18

IV. Common Mechanisms for Resolving International Construction Disputes (11) Advantages of international arbitration over court litigation for intern disputes? • Neutrality: avoid home courts of other party • Enforceability: arbitral awards much more enforceable across borders than court judgments, thanks to New York Convention • Flexibility: parties can design, in their contract, their own dispute resolution mechanism • Finality: no court or other review of the merits of an arbitral award • Cost and time savings? As compared to which courts? • Confidentiality? 19

IV. Common Mechanisms for Resolving International Construction Disputes (12) Advantages of court litigation over international arbitration? § Joinder or consolidation available before courts without further party consent No 50 -50 decisions in court. Perhaps, but is that what happens today in arbitration? Lack of finality (review of merits available)? Courts can be less expensive and time-consuming? In Singapore, yes, but not in India, for example 20

IV. Common Mechanisms for Resolving International Construction Disputes (13) What if we don’t include an arbitration clause in our contract? • No arbitration clause in contract usually = no arbitration. • But exceptions include: − where parties agree to arbitration when dispute arises (rare) − where party has grievance against state or state body, and there is investment treaty coverage (investment treaties usually allow arbitration without prior arbitration clause) • Alternative to arbitration is either selection in contract of court(s) or, if no selection, court with jurisdiction by default 21

V. Introduction to FIDIC and its Dispute Resolution Provisions (1) What is FIDIC? • FIDIC stands for Fédération Internationale des Ingénieurs. Conseils or International Federation of Consulting Engineers • Formed in 1913, now a global organisation with members from 70 plus countries and secretariat based in Switzerland • FIDIC Forms of Contract are widely used forms (i. e. model contracts) for engineering, construction, provision of mechanical and electrical works in international projects • FIDIC introduced the concept of Dispute Board into its Orange Book contract in 1995 • In November 1996 FIDIC introduced the procedure into Clause 67 of its Red Book 22

V. Introduction to FIDIC and its Dispute Resolution Provisions (2) • In 1999, FIDIC revised its Forms of Contract • The four FIDIC Forms of Contract are: − Conditions of Contract for Construction (New Red Book) − Conditions of Contract for Plant and Design-Build (New Yellow Book) − Conditions of Contract for EPC Turnkey Projects (Silver Book) − Short Form of Contract (Green Book) (Note that FIDIC will be launching its Design, Build and Operate (DBO) Contract (Gold Book) in mid 2008) Note that these are just model contracts. The parties are expected to adapt them to their own projects 23

V. Introduction to FIDIC and its Dispute Resolution Provisions (3) • FIDIC Dispute Resolution provision is set out in Clause 20 of the New Red, New Yellow and Silver Books • Approach used by FIDIC is the Dispute Adjudication Board (DAB) which issues a decision, as opposed to Dispute Review Board which issues a recommendation • The FIDIC DAB provisions apply whenever a FIDIC contract is used unless parties delete the provision • FIDIC DAB decisions are immediately binding and parties are obliged to comply with the decision pending other stages of the dispute resolution procedure, e. g. revised by amicable settlement or arbitral award • New Red (Construction Contract) and New Yellow (Plant and Design-Build Contract) Books provide for Engineer to act as adjudicator and DAB. Silver Book (EPC Contract) has 24 no

V. Introduction to FIDIC and its Dispute Resolution Provisions (4) FIDIC Procedure for Contractor’s Claims 28 day Notice of Claim to Employer 42 day “Fully Detailed Claim” to Engineer Clause 20. 1 Contractor’s Claims New Red/Yellow Books 28 day Notice of Claim to Engineer Silver Book 42 day “Fully Detailed Claim” to Employer “Final Claim” 28 days after end of effects 42 days after receipt of claim Engineer’s Response 42 days after receipt of claim Employer’s Response Clause 3. 5 Engineer to“Agree or Determine” Clause 3. 5 Employer to“Agree or Determine” Determinations Given effect unless Agreement/Determination Contractor’s Notice of Dissatisfaction given effect unless revised under Clause 20 14 days of receipt 25

V. Introduction to FIDIC and its Dispute Resolution Provisions (5) FIDIC Procedure for Contractor’s Claims Reference to Dispute Adjudication Board (DAB) (1 or 3 people) Clause 20. 2 Clause 20. 4 DAB Decision within 84 days of reference No Notice of Dissatisfaction within 28 days of Decision within 28 days after 84 days of referenc DAB Decision final and binding Clause 20. 5 “Amicable Settlement” stage Clause 20. 6 ICC Arbitration within 56 days after Notice of Dissatisfaction 26

V. Introduction to FIDIC and its Dispute Resolution Provisions (6) FIDIC Procedure for Employer’s Claims New Red/Yellow Books Clause 2. 5 Employer or Engineer gives Employer’s Claims notice and particulars to Contractor Clause 3. 5 Determinations Silver Book Employer gives notice and particulars to Contractor Clause 3. 5 Engineer to “Agree or Determine” Clause 3. 5 Employer to “Agree or Determine” Agreement/Determination given effect unless revised under Clause 20 Given effect unless Contractor’s Notice of Dissatisfaction 14 days of receipt Clauses 20. 2 and 20. 4 Reference to Dispute Adjudication Board (DAB) (1 or 3 people) (See previous diagram for full Clause 20. 4 procedure) Clause 20. 5 “Amicable Settlement” stage Clause 20. 6 ICC Arbitration within 56 days after Notice of Dissatisfaction 27

V. Introduction to FIDIC and its Dispute Resolution Provisions (7) • Procedural Rules for DAB are set out in Annex to Dispute Adjudication Agreement • DAB shall visit site at intervals of not more than 140 days but not less than 70 days at request of either Employer or Contractor • DAB to use site visits to become and remain acquainted with progress of the Works and actual/potential problems or claims • DAB to produce a report after each site visit • DAB may conduct hearings and request exchange of statements • DAB can adopt an inquisitorial procedure and refuse admission to hearings or grant audience to any persons other than parties’ representatives 28

VI. Conduct of a Typical International Arbitration (1) A Typical ICC Arbitration Procedure Request for Arbitration Answer to Request and Filing of Counterclaims Constitution of Arbitral Tribunal Terms of Reference and Procedural Timetable Application for Interim Relief Post-Hearing Submissions Final Award & Costs Hearings Exchange of Written Submissions Limited Discovery (Exchange of Documents) Typical duration: 15 -24 months 29

VI. Conduct of a Typical International Arbitration (2) Four phases of the typical international arbitration • Introductory phase: exchange of outline submissions and constitution of tribunal. • Written phase: exchange of longer written pleadings and evidence. • Hearing phase: witness hearings and hearings of argument. • Award phase: arbitrators deliberate and draft their award. initial 30

VI. Conduct of a Typical International Arbitration (3) General remarks about international arbitration procedure • Often an international hybrid of common and civil law procedures. • Examples: IBA guidelines on evidence and conflicts. • More informal than courts (no wigs, advocates usually sit)… • • … but equally adversarial. Often fascinating and difficultural clashes (e. g. document production, preparation of witnesses…). 31

VI. Conduct of a Typical International Arbitration (4) International arbitration personnel • Worldwide arbitration community/mafia. Centred in Europe, especially France, Switzerland the UK. Paris probably still the headquarters of international arbitration (seat of the ICC). But now a growing pool of international arbitrators from Asia and based in Asia. • Increasingly two groups: arbitrators (older, academics, barristers, and in boutique firms) and counsel (younger, in larger firms). The former often graduate from the latter. Some overlap between the two groups. • Case for specialisation: arbitration procedures and personnel increasingly distinct from those of local courts. What you know and who you know are both important. 32

VII. Investment Treaty Arbitration and Construction Disputes (1) • If the owner in an international construction project is a sovereign state instead of a private company, a contractor with a claim may be able to start investment treaty arbitration instead of following contractual dispute resolution procedures • Or if state interferes with a contractor’s project with a private owner, contractor may still have a claim against the state under an investment treaty • Typical claims under investment treaties are based on interference by the state in the project, including by action of the legislature, the courts, local government, tax authorities etc • Investment treaty arbitration can be better than “normal” arbitration as it gives access to neutral, offshore proceedings, and international law remedies that may not be available under contract or in the courts • Can be very powerful, especially as China has concluded over 33

VII. Investment Treaty Arbitration and Construction Disputes (2) • An investment treaty is an agreement concluded by two or more states to promote and protect investment by investors of those states in the territory of other states party to the treaty. Example: Investment Treaty China Investment Chinese Investor Investment State X Protection and Promotion State X Investor China Protection and Promotion 34

VII. Investment Treaty Arbitration and Construction Disputes (3) • BITs cover investments by an investor of one country in the territory of the other country • “ Investor of a Contracting State” is usually defined to include: − Individuals who are nationals of the State; and − Companies organised under the laws of the State • Indirectly controlled investments are often covered • “Investment” is usually broadly defined to include any kind of asset, which can include any claim to money or to performance under contract • So definition of covered investment is very wide, far beyond traditional conception 35

VII. Investment Treaty Arbitration and Construction Disputes (4) • Question – are construction projects considered an “investment” in the context of investment treaty arbitration? • See Salini v Morocco (2001) – two Italian contractors filed for ICSID arbitration against Morocco over a dispute arising under a contract for construction of a highway. The contract provided for resolution of disputes in domestic courts. Claimants alleged that Morocco’s failure to pay was a violation of the “fair and equitable treatment and protection against indirect expropriation” in the Morocco-Italy BIT. Morocco raised jurisdictional objection that dispute was not in relation to investment under Art. 25(1) of ICSID Convention and Art 1 of the Morocco-Italy BIT. • Held: Contract for construction of a highway was an investment under both treaties. Tribunal upheld jurisdiction over the investors' claims. 36

VII. Investment Treaty Arbitration and Construction Disputes (5) • See also R. F. C. C. v Morocco, Bayindir v Pakistan (both highway construction projects), Impregilo v Pakistan (construction of a dam) and Saipem v Bangladesh (pipeline construction project) • In all cases, the construction projects were held to be investments covered by investment treaty in question and the ICSID Convention. The contractors could therefore all proceed with their claims in neutral, offshore international arbitration regardless of the dispute resolution provision in their contract • So, if you have a dispute with a state or state agency, think about investment treaty arbitration even if you have an arbitration or litigation clause in your contract, or even if you have no contract 37

VIII. Advice on Drafting International Construction Dispute Resolution Provisions (1) • Consider interim dispute resolution mechanism, as can be advantageous to contractors • Final mechanism should be arbitration in most cases • Resist temptation to overdraft, keep dispute resolution provisions simple: use model institutional clauses or standard form contracts (easily available online) as the basis • Caution with carve-out clauses, e. g. sending some disputes to court/expert and the rest to arbitration 38

VIII. Advice on Drafting International Construction Dispute Resolution Provisions (2) • Resist temptation to limit pool of arbitrators, e. g. by requiring arbitrator to have esoteric experience • Don’t forget the governing law clause; and if you are using a standard form contract, choose governing law that is compatible with the contract • Consider contracts • If consolidation/joinder impossible, try to get the dispute resolution clauses as similar as possible, e. g. same arbitration rules, governing law provisions consolidation/joinder for supplier/subcontractor 39

VIII. Advice on Drafting International Construction Dispute Resolution Provisions (3) • Ideally, make sure that dispute resolution clauses in performance bonds are identical with main contract dispute resolution provisions • No language stating that contractor must wait until after completion before commencing final dispute resolution proceedings • Ask for courts or (more realistically) arbitration in your home jurisdiction as a starting point • Agree to an arbitration friendly place of arbitration if home jurisdiction not available, e. g. Hong Kong, Singapore, London, Paris • If in doubt, seek specialist advice • Keep enforcement considerations in mind, e. g. location of other 40 party’s assets

VIII. Advice on Drafting International Construction Dispute Resolution Provisions (4) • For China-related arbitration, consider: − That PRC Arbitration Law is currently interpreted by many as not permitting in China either ad hoc arbitration or arbitration administered by institutions based outside China − Specifying that arbitration administered by selected institution, rather than merely referring to selected arbitration rules − Providing for appointment of arbitrators other than those on the institution’s panel − Providing that sole/presiding arbitrator not being the same nationality as the parties − Avoiding two languages (e. g. English and Chinese) as the languages of the arbitration: keep it to only one language 41

IX. Advice on Preparing for and Conducting International Construction Disputes (1) • Before a dispute arises: − Establish sound, dedicated policies and procedures for correspondence, other documentation and claims handling − Keep supporting documents and contemporaneous evidence well, e. g. diaries, photographs, maps, drawings (preferably electronically) − Maintain a set of programmes which are regularly updated throughout the course of the project so that the delay experts will be able to prepare their report in the event of a delay claim 42

IX. Advice on Preparing for and Conducting International Construction Disputes (2) • When a dispute arises: − Keep a close eye on notice provisions and other conditions precedent to claims in your contract, and time limitations for bringing claims and defences − Gather facts and seek legal and expert advice early − Take care in what you write and don’t write to the opposing party (do protest, don’t make unintended concessions) − Evaluate chances of success early, and act upon that evaluation − Carefully explore all settlement options, especially ADR (e. g. mediation) − Look at exposure of performance bonds 43

IX. Advice on Preparing for and Conducting International Construction Disputes (3) • During arbitration or litigation: − Set up dedicated internal team to maximise efficiency and minimise disruption to project − Work with specialist external lawyers, arbitrators and experts, − Work together with your external team, don’t just let them get on with it − Prepare and monitor realistic litigation budgets − Get management commitment to ensure cooperation of project participants − Always keep settlement and ADR possibilities in mind 44

Contact Information John Savage Shearman & Sterling LLP 6 Battery Road, #25 -03 Singapore 049909 Tel : +65 6230 3008 Fax : +65 6230 3899 Email : john. savage@shearman. com Website : www. shearman. com 45